Accounting: Chapter 1
Stockholders equity équation
stockholders equity= common stock + retained earnings
Advantages to being a corporation
stockholders have limited liability
What accounts make up stockholders' equity accounts?
-Retained earnings -common stock
The system that maintains records of a company's operations and then communicates that information to decision makers is referred to as
Accounting
Accounting equation
Assets = Liabilities + Stockholder's Equity
Which financial statements shows a firm's financial position on a particular date?
Balance sheet
What appears on the statement of stockholders' equity?
Beginning balance of retained earnings Dividends Net income
Measuring business activities and reporting those measurements to external parties is the function of ______ accounting.
Financial
Retained earnings equation
Retained earnings = all net income -all dividends
Income statement equation
Revenues - Expenses = Net Income
Sole proprietorship
a business owned by one person
Partnership
a business owned by two or more persons
Corporation
a company that is legally separate from its owners
Balance sheet (statement of financial position)
a financial statement that presents the financial position of the company on a particular date -summarized by the accounting equation assets= liabilities + stockholders equity
Common stock
an external source of stock holders equity where it is amounts invested by stockholders
Retained earnings
an internal source of stockholders equity over the life of the company
Operating cash flows
cash receipts and cash payments for transactions involving revenue and expense activities during the period -the cash effects of the same activities that are reported in the income statement to calculate net income
Investing cash flows
cash transactions for the purchase and sale of investing and long-term assets
Financing cash flows
cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends
Assets examples
cash, land, account receivable, notes receivable, vehicles, supplies, equipment
Investors
decide whether to invest in stock -they want to make good decisions related to buying and selling their shares of the company's stock
Creditors
decide whether to lend money -make decisions related to lend money to the company: will the company be able to repay its debt and interest when they come due?
Customers
decide whether to purchase products
Dividends are NOT
expenses
Statement of cash flows
financial statement that measures activities involving cash receipts and cash payments over an interval of time
Accounts that include the term "payable" typically are classified as
liabilities
Amounts owed to creditors are
liabilities
Revenues minus expenses equals
net income
What appears on both the income statement and the statement of stockholders' equity?
net income
When expenses are greater than revenues, it is referred to as
net loss
Many liabilities are referred to as ___ to indicate that amounts must be paid.
payables
Financial statements are
periodic reports published by the company for the purpose of providing information to external users -they give investors and creditors the key information they need when making decisions about a company
Creditor
person or institution to whom money is owed -Lends money to a company
Limited liability
prevents stockholders from being held personally responsible for the financial obligations of the corporations
Income statement (statement of operations, statement of income, profit and loss statement)
reports the company's revenues and expenses over an interval of time -shows whether the company was able to generate enough revenue to cover the expenses of running the business
Long term assets
resources owned by a company that are thought to provide benefits for more than one year
The net income earned by a corporation and not yet paid to shareholders?
retained earnings
Revenues are
sales of goods or services to customers
Any transaction that affects the income statement ultimately affects
the balance sheet through the balance of retained earnings
Double taxation
the company first pays corporate income taxes on income it earns -then stockholders pay personal income taxes when the company distributes that income as dividends to them
Expenses
the cost of providing products and services and other business activities during a current period
Expenses are:
the costs of doing business that are necessary to produce revenue
The four financial statements published to provide information to external users include
-income statement -stockholders equity -balance sheet -statement of cash flows
The two primary functions of financial accounting are
-measure business activities. -communicate measurements to investors and creditors afor
Three categories of all cash transactions
-operating cash flows -investing cash flows -financing cash flows
Disadvantages to sole proprietorship and partnership
-owners must have sufficient personal funds to finance the business in addition to the ability to borrow money -neither offers limited liability meaning that owners are held personally responsible for the activities in the business
The fundamental model of business valuation is commonly referred to as the
accounting equation
Ending retained earnings is calculated as
beginning retained earnings + net income - dividends
Change in cash =
operating cash flows + investing cash flows + financing cash flows
Net income
the difference between revenues and expenses -when revenues are greater than expenses
In accounting, the term net is used to describe
the difference between two amounts
Statement of stockholders equity
a financial statement that summarizes the changes in stockholders' equity over an interval of time
Accounting
a system of maintaining records of a company's operations and communicating that information to decision makers
Liabilities
amounts owed to creditors -money owed to a bank -salaries -supplier $$ -utility companies -government taxes
Liabilities =
assets- stockholders equity
Dividends
cash payments to stockholders -distributions to OWNERS of the company
The balance sheet shows that a company's resources equal _____ claims to those resources.
creditors claims plus owners'
A distribution of net income to owners is called a(n)
dividend
Disadvantage to corporations
double taxation
Shareholders' equity arises primarily from amounts invested by shareholders and amounts ______.
earned by the corporation
Other names for net income
earnings profit
Dividends paid to shareholders is on which financial statement?
statement of stockholders equity
For a corporation, the owners' claims to the resources of a company are called
stockholders equity
Total assets-total liabilities
stockholders equity
Revenues
the amounts recognized when the company sells products or provides services to customers
Stockholders' equity is
the owners' claims to resources of the corporation.
Retained earnings represents
the total net income earned over the life of the company that has not been distributed as dividends.
Assets
the total resources of a company -cash -equipment -supplies -inventory for sale -buildings -land -investments
Investing activities
transactions involving the purchase or sale of resources that are expected to benefit the company for several years, such as the purchase of equipment.
Operating activities
transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so like rent, salaries, utilities, and advertising
Financing activities
transactions the company has with investors and creditors, such as issuing stock and borrowing money from a local bank
Net loss
when expenses are greater than revenues